1.Why is the time value of money concept important?
In what quantitative decisions in your personal life or employment might the time value of money be applied?
2 . Credit card companies offer different interest rates and terms for using their credit card. Obtain detailed information from two credit card companies about their interest rates and compounding frequency on purchases and compare the cost of using the two cards. Which card would you prefer to use and why?
3.Can you share a comparison of 2 credit cards which you have or currently use? What are the terms of the cards (interest rate, compounding period, fees, etc.)?
Note: Make sure to give references for the source of your data
4. .If you have a situation, where you have the annual percentage rate (also know as nominal interest rate) but the compounding period is not annual, you need to do the following to correctly calculate the PV or the FV.
- You need to adjust the annual rate to an interest rate per compounding period by dividing the annual rate by the number of compounding periods per year.
- You need to adjust the number of compounding periods by multiplying the number of years by the number of compound periods per year.
The formula is now: FV = P (1 + r/n) ^nt
where n = the number of compounding periods per year and t = number of years.
For example, assume I have received an inheritance of $20,000. I want to save for a down payment for a house that I want to purchase in 5 years. Is it better to put the money in an investment that will pay me a 6% annual interest rate compounded annually or a 6% annual interest rate which is compounded monthly (12 times per year)?
Case 1: FV = $20,000 * (1 + 0.06)^ 5 = $26,764.51
Case 2: FV = $20,000 * (1 + 0.06/12)^(5*12) = $26,977.00
So, given this example:
1) Can anyone provide an example of a situation where interest may be compounded more frequently than annually?
2) If you were taking out a loan, would you want your interest compounded annually or more frequently (for the same annual interest rate)?
3) If you were making an investment (or saving money), would you want your interest to be compounded annually or more frequently (for the same annually interest rate)?
** You can use Excel to make the FV calculations.